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Understanding The Tax Benefits of Hiring Family Members

Understanding The Tax Benefits of Hiring Family Members

December 18, 2023

Running a business is challenging! There are many balls to juggle, and you need help, not just any help! You need to find someone who understands your goals for the business, is committed to the success of the business, and works as hard as you are in your business. For many companies, the answer is hiring a family member. There are benefits to hiring a family member, and those benefits can extend to your taxes.

Working With Your Spouse

If you and your spouse are jointly carrying on a trade or business and sharing in the profits and losses, they may be considered partners whether or not they have a formal partnership agreement. There are different filing requirements for a sole proprietor vs. a joint venture functioning as a partnership. Spouses can elect not to treat their joint venture as a partnership through a qualified joint venture election.

Qualified Joint Venture

Spouses may elect to a qualified joint venture in trade or business where:

  • The spouses are married and file a joint return,
  • Both spouses materially participate in the trade or business and
  • Both spouses elect not to be treated as a partnership

This election only applies to businesses owned and operated directly by spouses, not through a state law entity like a limited partnership or limited liability company. 

Employment Taxes 

If the business has employees, either of the spouses acting as sole proprietors may report and pay the employment taxes. The spouse must have an Employer Identification Number (EIN) for their sole proprietorship. If employment taxes were filed or paid under the partnership's EIN for part of the year, the spouse may be considered the employee's "successor employee" for determining whether wages reached the Social Security and federal unemployment wage base limits.

Family members employed in the business (spouse or parent employed by a child) are subject to income tax withholding and Social Security and Medicare taxes. The Federal Unemployment Tax ACT (FUTA) does not apply.

Children Under 18 Working In The Business

There are special rules for children employed by parents. Children under 18 working for a sole proprietorship or partnership where each partner is a parent are exempted from Social Security and Medicare taxes on their wages. Additionally, wages paid to a child under 21 are not subject to FUTA.

We understand running your business is your primary focus, and navigating the complexities of the tax code is not at the forefront of your mind. That is where we come in. Our team is here to gain a comprehensive understanding of your specific business and challenges. We invest the time to learn about your business and goals to optimize your tax strategy to ensure you receive the maximum amount of allowable benefits. 

Reach out to our team to discuss your specific needs. We are here to assist you every step of the way.